Small opening for raising funds

There are opportunities for small companies to harness the power of crowds.

Shaun Drummond

For smaller companies, funding options are a mixed bag that includes angel investors, private equity and banks. Further down the scale, there are government grants and, at the very early stage, “friends, family, fools and followers”, as one small company funding adviser puts it.

That early stage, however, now holds much more potential thanks to the internet and the phenomenon of crowd funding, which is getting a new lease of life due to legislation passing through the US Congress to ease restrictions on raising finance directly.

Australia already has the Australian Small Scale Offerings Board (ASSOB) that allows up to $5 million to be raised without a prospectus, but it is limited to 20 investors. Crowd funding, however, relies on many people putting in small amounts. Offering shares this way is not allowed under Australian law, so most sites, including Pozible, which has been operating from Melbourne for several years, and Powerup, which just started in Sydney, give small rewards instead, like free use of the first product produced.

In Britain, equity stakes are allowed and as a result much larger sums are raised. One British start-up raised £1 million recently via Crowdcube.

Yanese Chellapen, director of small business adviser Pennam Partners, which is starting up a venture capital fund here, is an advocate for reducing restrictions on this source of funds, and for offering government incentives to help established businesses raise funds more easily.

“Crowd funding, while it’s not an answer by itself, would assist businesses in the $0 to at least the $1 million range to raise cash,” he says.

There are many other possibilities already in place in Australia, however. As well as ASSOB, there are various government schemes to encourage investment, including the Early Stage Venture Capital Limited Partnership, which allows investors in registered venture capital firms to claim tax exemption for dividends. Companies with assets of less than $50 million can access these investments.

There are also grants available. However, Chellapen says the government “should be doing more to invest or co-invest cash in micro and small businesses either as an equity participant or as a loan”.